Recent Posts

I bet many of the good folks in Great Falls, Montana, were more than a little worried earlier this month after a local television station there sent out an ominous message warning viewers that the dead were “rising from their graves and attacking the living.”

Hold on, hold on. Before you grab your shotgun and hunker down in the basement, consider this: It turns out Montana wasn’t ground zero for the dreaded Zombie Apocalypse.

Nope. It was just a hoax — thank God — perpetrated by some clever joker who managed to hack the station’s emergency alert system.

I know. But “The Night of the Living Dead” will have to wait.

Our Prosperity Is An Illusion

That being said, I do believe America is in for some tough times ahead. I still believe America is the greatest country on earth, but we’ve had it too good for too long and, as a result, our nation has become sadly complacent with its finances. So much so that I believe we’ve crossed the Rubicon.

Our government is now so massive, and its obligations — both present and future — are so large that, barring a remarkable and sudden change of attitude by our politicians, a systemic economic collapse is inevitable.

The US National Debt is currently more than $16 trillion. Unfortunately, the US currently owes, depending on who you believe, somewhere between $50 and $100 trillion more in unfunded liabilities for things like Social Security, Medicare and public employee pensions.

America has been able to run up these huge debts because it broke away from the gold standard in 1971. The gold standard imposed at least a modicum of fiscal responsibility and faith in the US dollar because the world’s central banks were allowed to exchange their greenbacks for the gold sitting in Fort Knox.

But once the gold standard was abandoned, our politicians were freed from the constraints that had previously forced them to be fiscally accountable. Pandora’s box was opened.

Since then, lawmakers have been borrowing an unlimited quantity of freshly-printed money to fund their spending sprees — courtesy of the Federal Reserve Bank — thereby eliminating the need to worry about tax hikes.

As you can see by the chart below, government spending — and the inherent money printing that is ultimately required to finance it — is now completely out of control; the National Debt is expected to reach $20 trillion by the end of this decade.

Of course, there’s no such thing as a free lunch. Every new dollar that is printed by the Fed increases the money supply, which in turn reduces the value of the dollars already existence — including the ones in your wallet and retirement account.

As you can see from the chart below, soon after the United States abandoned the gold standard in 1971 — and our politicians began to greatly expand the size and scope of the government — cumulative price increases embarked upon an exponential trajectory. Those price increases are the result of the declining purchasing power of the US dollar. In fact, the buck’s purchasing power has been decimated since 1971; so much so that today you would need $559 to buy something that cost $100 back then.

Source: Iacono Research

Clearly, abandoning the gold standard was a fiscally reckless decision, akin to giving a teenager a credit card without a credit limit. To illustrate, let’s first look at the current impacts of America’s spending addiction:

2012 Federal revenue: $2,468,000,000,000

2012 Federal budget: $3,820,000,000,000

2012 New debt: $1,352,000,000,000

National debt: $16,350,000,000,000

Interest paid on National Debt in 2012: $220,000,000,000

Proposed 2013 sequestration spending cuts: $ 85,000,000,000

Next, let’s drop a whole bunch of zeros from those figures to make the federal government’s ledger look at least little more like a typical household’s finances:

The figures reveal a dire situation. A financially responsible individual who found himself in a similar situation would drastically cut his spending while looking for ways to increase revenue.

Our politicians insist that’s exactly what they’re doing but, as you can see from the proposed spending cuts, they’re really just going through the motions, financing the nation’s obligations in the same way any financially irresponsible individual would — by taking on even more debt through the selling of US Treasury bonds.

It’s a practice that’s essentially no different than using a VISA card to pay the MasterCard bill.

The Illusion Is Unraveling

The problem is, using one credit card to pay another credit card bill only works for so long. As long as a debt addict can continue to find lenders who are willing to extend additional credit, the game can continue. But once the pool of lenders dries up, the game is over.

No, I can’t say exactly when this will happen. But it’s coming, folks — and when it does, middle-class America’s way of life will undergo a catastrophic change that will dramatically drop their standard of living forever more.

Until recently, the United States’ profligate spending wasn’t much of an issue. For years, plenty of investors — both foreign and domestic — have willingly parked a portion of their money into the perceived safety of America’s bonds. But over the long march of time, the dollar’s standing has seriously deteriorated and, as a result, foreign nations are becoming increasingly reluctant to buy US Treasury bonds because, thanks to the Fed’s near-zero interest rate policy, the risks are no longer worth the reward.

Normally, depressed demand for bonds results in higher interest rates, but so far the Fed has managed to keep bond demand artificially inflated via their quantitative easing campaigns. And the Fed is keeping US Treasury bond rates as low as possible now because interest payments on the National Debt already consume roughly 10% of annual revenue. If US Treasury bond rates increased to merely 5%, America would be forking over one-third of its annual revenue just to satisfy the interest on its $16.5 trillion National Debt; it would also be increasing its annual deficit by more than $800 billion.

The Beginning of “the End”

Although they won’t admit it, the Fed backed itself into a corner with its reckless easy-money policy. They know that once the money-printing party stops, interest rates will have to rise — and then the bond market will almost certainly crash. If that happens, things are going to get very interesting. For example:

As bond rates rise, mortgage interest rates will naturally follow them upwards. And since higher mortgage rates ultimately result in higher house payments for a given size loan, it follows that home prices will have to drop in order to keep them affordable — and the decline could be devastating.

The cost of borrowing will also go up for everyone else including small businesses, corporations, and state and local governments.

Once interest rates start rising, a vicious cycle can ensue as higher interest rates beget larger deficits, which in turn lead to still higher interest rates. As the debt piles up, and the faith in the US dollar continues to diminish, the US will eventually reach its day of reckoning. The US will then be faced with two very unpleasant choices for solving the crisis: print away the debt or default.

Default would lead to the loss of the US dollar’s standing as the world’s reserve currency which would, among other things, cause the price of imports to skyrocket. Consumers’ purchasing power would plummet, and the government would be forced to severely cut back on its spending since it would no longer be able to finance its deficits. However, this is politically untenable.

So the more-likely alternative is that the Fed will simply print away the debt. That would result in hyperinflation as the last vestiges of the dollar’s utility as a reliable store-of-wealth all but disappeared.

What Will Economic Collapse Look Like?

While I don’t expect a Zombie Apocalypse resulting from either scenario, temporary supply disruptions caused by market uncertainties will be inevitable — and that will lead to empty supermarket shelves, fuel shortages and, possibly, utility failures that will almost certainly result in civil unrest and increased crime in more densely populated areas.

The good news is a new (hopefully gold-backed) currency will be issued and society will slowly recover. Eventually. I’m hoping it will take no more than six months before the supply chain recovers enough to eliminate most shortages.

Thankfully, tangible assets won’t go up in smoke after the economy resets; your home, automobile, and other possessions will be unaffected.

Although it’s anybody’s guess, I believe Americans will be lucky if their post-collapse standard-of-living will be equivalent to half of what it is now; worst case, one-third. That ain’t so bad if you earn $1 million per year but, if my assumption is correct, and you earn $60,000 annually, then your post-collapse standard-of-living will be between $20,000 and $30,000 today.

The ensuing economic collapse won’t be the end of the world, but it’s going to be a wild ride. Next week, I’ll share some tips on what you can do to make it bearable.